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Cohn: Ontario’s perfect storm of budget trouble

Even if Ontario&rsquo;s deficit shrinks, its cumulative debt will keep growing &mdash; like a line of credit on your home that keeps sucking you in.

Even as Finance Minister Dwight Duncan, right, reins in the deficit over the next three years, the debt will consume an even higher portion of our economy, writes Martin Regg Cohn. (MIKE CASSESE / REUTERS)

According to the Liberal government, the sky is falling. Stripped of its pie charts — and the sweet and sour prose — Ontario’s fall economic statement lays bare the bottom line:

Houston, we have a revenue problem.

With economic storm clouds overseas, and uncertainty at home, the steady growth Queen’s Park was counting on for its cash flow is now stunted. That means the province will collect about $780 million less this year than Finance Minister Dwight Duncan was banking on.

(A one-time loan repayment from Chrysler will cushion the blow to $443 million. But who knows when car companies will be back for more?)

Our revenue problem means we now have an expenditure problem, tied to our perennial deficit problem: After decades of borrowing by the NDP, PCs and Liberals in power, the budget deficit is stuck at a daunting $16 billion (which all three parties now want to eliminate by 2017-18).

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But that’s the least of our many problems. The trouble with piling on deficits year after year is that, cumulatively, they create a debt problem — now standing at $240 billion.

And the bad news is that despite a shrinking deficit, the debt keeps on growing — like a line of credit on your home that keeps sucking you in. Even if the budget is balanced on schedule within six years, our debt is still projected to grow rapidly as a percentage of the total economy (debt-to-GDP ratio).

A bit of history. Under Bob Rae’s NDP government in the early 1990s, the debt ratio doubled from 14 per cent of the economy to 29 per cent. Under the supposedly fiscally frugal Mike Harris Tories, it rose even higher, to about 33 per cent. The ostensibly spendthrift Liberals brought it down to about 27 per cent, but when the recession hit the ratio bounced back up to 35 per cent.

Even as Duncan reins in the deficit over the next three years, the debt will consume an even higher portion of our economy, peaking at 41 per cent in 2015.

It gets worse: These timelines were predicated on a rebounding economy at the time of the last budget (optimistically titled, Turning the Corner). Seven months later, the economy is heading into turbulence. Just to stay the course, the Liberals must bend the cost curves even more than first thought — limiting the overall increase in spending to 1 per cent, instead of the 1.4 per cent announced last March.

Ontario’s auditor general expressed skepticism about that original spending target when he reviewed the budget last summer. Yet now Duncan wants to go further: As he told me last week, and reconfirmed Wednesday, he foresees “real cuts of upwards of 33 per cent in some ministries” in order to protect health and education, which remain the two priority areas.

So how does Ontario’s multi-tasking treasurer protect us from a perfect storm of problems — revenue, spending, deficit and debt — deluging us all at once?

The Tories insist there is no revenue problem, merely a spending problem. They want a legislated salary freeze on public servants, even though government wage settlements are now trending at 1.6 per cent — below the private sector (1.9 per cent) and municipalities (2.4).

The NDP counters that there is a different kind of revenue problem, urging the government to stop giving corporations a break with lower tax rates. But the opposition parties can’t agree on each other’s proposals.

The Liberal solution: a commission to reform public services, headed by economist Don Drummond. But no commission is a magic bullet — merely executing its best ideas for restraining and restructuring government will cause collateral damage.

So if the sky is indeed falling, what’s on the horizon for Ontario? Welcome to minority government, where every party has its own ideas about how to govern.

Trouble is, Ontario’s political rivals won’t achieve a shared remedy without first agreeing on a common reality. Problem-solving only works if you can identify the problem.

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